The Arras Contract: Essential Aspects. Carlos Baño.

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The Arras Contract: Essential Aspects

In current real estate transactions for the purchase of built housing, whether new or second-hand, this document has completely replaced the private purchase contract. The arras or deposit provided for in Article 1454 of the Civil Code has traditionally been a preliminary document that operated as a reservation document. Without specifying major features of the real estate transaction, the sale of a property was committed in exchange for a deposit with the stipulated sanctions for breach.

Traditionally, this contract was replaced by the private contract when the stipulated time came, where the parties already decided to continue with the operation and agreed on the terms of the purchase. Probably, the intensity of real estate transactions in our country and their significant number due to the boom and undoubtedly the intervention of real estate agencies has resulted in the need for speed in transactions, merging both documents. Thus, the known as the arras contract is a fusion between both traditional documents. Nowadays, it is rare for a real estate transaction to proceed without the arras contract being followed by the deed.

Given this reality, the buyer who wants to sign an arras contract must consider this and demand content equal to a private purchase contract. This article does not aim to explain what the arras are or their different legal concepts but to basically define what an arras contract is and the content it must have, as well as anticipating many problems or the casuistry it generates.

Who should sign an arras contract?

Only those with a legitimate interest in the real estate transaction should sign. On the seller’s side, it can only be the owner, and on the buyer’s side, it must be whoever is interested in the purchase. This last point often generates conflicts because transactions are done very quickly and mistakes are made that later generate many problems in correction.

The most problematic is on the seller’s side, as real estate agencies frequently draft the arras contracts and sign them themselves, acting on behalf of the owner without having the authority to do so, which does not bind the property. We always advise that the owners themselves sign or, if not, that any representative has the accredited power of attorney accompanying the contract and stating the representation.

Of extraordinary importance is the need for the payment of the arras to be made to the seller’s own account and to be stated in the contract. If it is done in the real estate agency’s account, the owner must authorize it. Otherwise, the property can never be claimed to return the arras twice. This is extremely important because we have had lawsuits on this particular matter. All co-owners must sign the arras contract or representation to be bound by the transaction.

If not, it could result in the nullity of the contract or limit the buyer to forcing the sale only to the signing owner, reducing the real estate transaction to the sale of the corresponding part of that owner but not the others.

For the buyer, it is essential to establish whether the contract is solely for those who sign it or if it allows assignment to a third party. This is crucial because, often in a hurry, a property is reserved, arras are signed, but the transaction was for another person, family member, or friend. If this is the case, it is necessary to include a clause allowing the contract’s assignment to a third party.

Breach of contract by the seller

The breach of the clauses and commitments acquired by the seller will have the consequences agreed upon according to the nature of the arras clauses. These can range from the return of double the amount given as arras (penitential arras) to the buyer’s right to demand compliance with the contract and thus the deed (confirmatory arras).

As seen, the arras contract can function as a promise contract if the arras are agreed upon as penitential since it would only give the buyer the right to demand double the arras delivered. Often the buyer thinks that by signing an arras contract, they are signing a purchase contract and therefore binding for the seller. This is not so unless it is agreed that the arras are confirmatory. In fact, operations are frustrated because, in the interim, the seller finds a more interesting offer and chooses it over the first, even though it means returning double the arras delivered.

It is important for the buyer to know what they are signing and their expectations. If the arras are intended to operate as an advance payment towards the buyer’s obligation to pay and if the desire is to have the purchase completed without either party being able to withdraw, the type of arras to be signed should be confirmatory arras.

Breach of contract by the buyer

The main breach by the buyer is not being able to comply with the deed when the time comes, resulting in the loss of the amount given as a deposit. In the cases we handle at the firm and where we represent buyers, we always try to prevent this situation. Therefore, when it is close to the term and there are some problems, we try to negotiate a term extension because, often, the buyer does not want to comply but is unable to meet the deadline but can do so a few days later.

It is clear that if the buyer cannot comply for any reason, there will be no need to request an extension, and they will have to accept the penalty.

The contract subject to condition compliance

Increasingly, due to the speed with which these contracts are usually signed, the seller, owner, or buyer is not in a position to complete the deed at that moment, requiring the fulfillment of some requirement that has not yet been processed. For example, the buyer may need to apply for a loan from a bank for the total or partial financing of the purchase.

In these cases, conditional clauses must be incorporated into the contract, subjecting the document or contract’s validity to the completion of these procedures or conditions. These would be suspensive clauses, subjecting the contract’s consummation to the fulfillment of a future condition.

Thus, situations such as being in the process of accepting inheritance by the sellers, which determines that the property is not yet registered in their name until the acceptance procedures are completed. Another common case is pending mortgage or charge cancellations or registering in the property registry declarations of works done in the past that have not yet been reflected in the registry.

In all these cases, there is no problem in making an arras contract with these additional clauses, satisfying the parties by committing to a real estate transaction without risk. It should be clear that failing to meet the condition within the agreed period will render the contract invalid, and the seller must return the arras to the buyer. Alternatively, the parties can always extend the period for fulfilling these conditions.

The term for the deed

The buyer and seller must agree in the arras contract on a term to carry out the deed. They should consider that it must be a term and not a fixed date to allow the parties to request the public deed at any time during this period. The buyer must urge the seller to grant the public deed and agree on a minimum notice period in the contract to allow the seller to take necessary measures, including providing the notary with the property’s documentation.

The term can be extended voluntarily by the parties if there is an agreement, as if not, the contract will have expired, and the parties must accept the consequences of not having completed the purchase.

There is often much casuistry about this concept and requirement, which is very delicate. There are many times when the seller, for convenience, interprets the term as a fixed date and not a possibility or last day to deed. Therefore, they do not recognize the buyer’s right to deed before that term. We can assure you that this has happened in cases handled by this law firm.

Finally, if there is no agreement between the parties on extending the term, it is unalterable, and the contract will cease to be valid with the consequences stipulated.

Minimum content

As mentioned at the beginning, the arras contract essentially replaces the purchase contract. Therefore, it must meet the minimum requirements of a purchase contract as follows:

It must contain a description of the purchase object, stating that the sale is free of charges and encumbrances and without any lease (if otherwise, the parties’ agreement must be specified).
It must clearly state who the registered owners are and who the sellers are.
It should establish the purchase price and payment method, as well as the amount paid as arras, stating that the remainder will be paid at the deed.
It should clearly set a term for the deed and the buyer’s right to choose a notary, with a notice period to inform the seller of the deed date.
Conditional clauses must be established if required for the transaction.
The nature of the arras and the consequences of their breach.
Description of the property’s registry and urban planning status if it is a property with land or rustic.
If it is a rustic property, its legal status, consistency with the registry and cadastre, and proof of no urban planning infringement at the respective town hall, among other requirements.
Contribution to transaction costs, clearly stating what the buyer and seller must pay.
The property subject to the purchase will be up to date with taxes, expenses, etc., and free of any debt,unless otherwise agreed by the parties.

Case law

This section aims to enumerate the conflictive casuistry that this type of contract generates. We rely on our extensive judicial and extrajudicial experience. Naturally, we will only enumerate but not elaborate, and for that, if you need it, consult Lawyer in Alicante, a professional firm where you will be attended with the utmost rigor and professionalism.

The loan is not granted to the buyer as required in the arras contract.
Despite the loan being granted, the seller does not accept a deed date before the term specified in the arras contract.
The conditions agreed upon in the contract are not met.
The seller does not provide documentation or provides it incompletely to the notary.
Inability to comply within the stipulated term due to force majeure.
Before the deed, a mortgage charge is noted on the property subject to the contract in the Property Registry.
The property has not been properly reviewed beforehand.
The condition of the loan being granted to the buyer was not agreed upon.
The Property Registry note and the property’s situation in the town hall were not properly reviewed beforehand.
The real estate agency signs the contract on behalf of the seller without accrediting representation.
One of the co-owners signs, but not the others.